FEATURE: China set to replace US as top foreign aid provider

by Chong Koh Ping

BEIJING (The Straits Times/ANN) - China may be set to become the preferred donor to the developing world, though a study says only a quarter of provided funds had a big impact on the recipient country's economic growth.

China has emerged as one of the most important foreign aid providers in recent years, rivalling traditional Western donors in terms of spending and impact, according to a recent study.

But out of the more than US$350 billion (S$475 billion) committed over the period from 2000 to 2014, only about a quarter of the amount or 23 per cent had a strong impact on economic growth for the recipient countries, the US-based research lab AidData said yesterday (Oct 11).

"This new window into China's overseas development programme is particularly important given the possibility of US retrenchment in both the aid and diplomatic spheres, and the challenges European donors have had meeting foreign aid spending targets," said Samantha Custer, director of AidData's policy analysis unit.

"If the United States follows through on its rhetoric and scales back its global footprint, China may be well-positioned to step into the breach and cement its role as a preferred donor and lender to the developing world," she added.

Indeed, Chinese spending has been comparable in scale and scope with the US, whose contribution totalled US$394.6 billion.

But one major difference was that 93 per cent of what the US provided was classified as official development assistance (ODA) - or aid in the strict sense - whereas the bulk of the more than 4,300 projects that China financed in 140 countries and territories fell outside this category, said the study.

Official financial transfers have to meet two key criteria to be considered as ODA, according to the Organisation for Economic Cooperation and Development. They have to be concessional loans with at least a 25 per cent grant element, and primarily for economic development and welfare.

China's financial transfers to other countries were mostly in the form of non-concessional loans, export credits to buyers or suppliers, or commodity-backed loans, said AidData's managing director Bradley Parks.

"These are flows with commercial or representational intent, which produce no detectable effect on economic growth for the recipient countries," said Dr Parks, who worked on the study with four other researchers.

They were meant to help China generate returns, create market opportunities for the country's companies or promote Chinese culture, he added.

One example of a commercial project was a US$1 billion loan that China Development Bank gave Petroecuador of Ecuador in 2010 for an oil agreement, said the research lab, whose study was based on information from more than 15,000 sources, including the media, governments, international organisations and academia.

China's offer of US$230 million to Jamaica to build a Chinese garden in 2013, however, was considered one with representational intent, and did not count as ODA.

The study also found that all those Chinese-funded projects considered as ODA produced the same economic growth impact as aid from the US and other Western donors, debunking the notion that Beijing was a "rogue donor" whose aid resulted in few economic benefits. And it found that Chinese aid did not undermine the effectiveness of Western aid.

China could surpass the US in its total official financing, given its current growth trajectory, but it would be some time before it could achieve the same impact, considering the relatively small proportion of funds devoted to ODA.

Dr Park told The Straits Times that China should relook its portfolio if it intended to increase the impact of its aid projects, something President Xi Jinping has recently indicated as a target.

"If China could reorient more of its overseas spending towards ODA, low-and middle-income countries would potentially be in a position to reap even larger economic growth dividends," said the AidData director.